2005 Ruling 2003-0051921R3 - Health and Welfare Trust

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the proposed transaction will result in the creation of a heath and welfare trust within the meaning thereof in IT-85R2

Position: Yes.

Reasons: The proposed health and welfare trust meets all of the criteria set out in IT-85R2.

XXXXXXXXXX 								2003-005192

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter, dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above named taxpayer. We acknowledge receipt of the draft proposed health and welfare trust attached to your XXXXXXXXXX letter and the additional information provided in your XXXXXXXXXX letters. We also acknowledge receipt of the additional information provided in our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge, none of the issues involved in the advance income tax ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of an advance income tax ruling previously issued by the Canada Revenue Agency ("CRA").

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) The "Corporation" is XXXXXXXXXX;

(b) The "Parent" is XXXXXXXXXX;

(c) The "Affiliated Corporation" is XXXXXXXXXX;

(d) The "Principal Shareholder" of the Parent is XXXXXXXXXX;

(e) The "Public Shareholders" own XXXXXXXXXX% of the publicly-traded voting shares of the Parent;

(f) "H&WT" is a health and welfare trust as described in Interpretation Bulletin IT-85R2;

(g) "Private health services plan" has the meaning assigned by subsection 248(1) of the Act;

(h) The "Plan" is the proposed health care and dental care coverage to be provided by the Corporation pursuant to the XXXXXXXXXX;

(i) The "Trust" is the proposed XXXXXXXXXX;

(j) The "Trustees" will consist of XXXXXXXXXX;

(k) The "Trust Agreement" is the XXXXXXXXXX to be entered into by the Corporation and the Trustees of the Trust;

(l) "Executives" mean XXXXXXXXXX of the Corporation or the Affiliated Corporation;

(m) "Executive Employees" mean retired Executives who have XXXXXXXXXX years of service and are eligible for a pension under the Corporation's or the Affiliated Corporation's pension plan;

(n) "Beneficiary" is an Executive Employee and the "Beneficiaries" are Executive Employees, their spouses and eligible dependents, each of whom is entitled to benefits under the Plan;

(o) "Related persons" or "persons related to each other" has the meaning assigned by subsections 251(2) and includes the deeming provision in subsection 251(3) of the Act.

Facts

1. XXXXXXXXXX.

2. The Corporation is a wholly owned subsidiary of the Parent. The Parent is a corporation incorporated under the laws of Canada. The Principal Shareholder owns XXXXXXXXXX% of the voting shares of the Parent and the Public Shareholders own the remaining XXXXXXXXXX% of the voting shares of the Parent. The Principal Shareholder is a publicly traded company.

3. XXXXXXXXXX.

4. Each of the Corporation, the Parent, the Affiliated Corporation and the Principal Shareholder is a resident of Canada for the purposes of the Act.

5. The Corporation and the Affiliated Corporation currently employ XXXXXXXXXX employees.

Proposed Transactions

6. The Corporation and the Affiliated Corporation will adopt the Plan for the Executive Employees. The Plan will qualify as a private health services plan.

7. The Corporation and the Affiliated Corporation will establish the Trust to administer the Plan. The Trust will be independent of the Corporation, the Parent and the Affiliated Corporation. No part of the corpus or income of the Trust can ever revert to the Corporation, the Parent, the Affiliated Corporation, related persons of the Corporation, Parent or Affiliated Corporation and any persons described in subsection 251(3) of the Act. The Trust is irrevocable until the purpose of the Trust has been fully attained.

8. The Corporation, the Affiliated Corporation and the Trustees will enter into the Trust Agreement pursuant to which:

(a) The Trustees will receive and administer the Corporation's and the Affiliated Corporation's contributions to the Trust;

(b) The Trustees will pay the required premiums in respect of the Plan whenever third party carriers are engaged to provide benefits;

(c) The Trustees will hold, maintain, administer, invest and re-invest the funds of the Trust; and

(d) The Trustees will administer the Trust as a H&WT in accordance with the terms of the Trust Agreement.

9. The Trust Agreement will provide that the funds in the Trust will consist of the following:

(a) the contributions made by the Corporation and the Affiliated Corporation; and

(b) the income derived from the investments made with the Trust's funds;

less

(c) the expenses incurred to administer the Plan and to invest the funds held by the Trust; and

(d) any premiums paid to a third party insurer to purchase applicable insurance policies.

10. The Trust will be administered by the Trustees as a separate entity and in accordance with the duties and obligations outlined in the Trust Agreement. Therefore, the Trust will not be recorded in the Corporation's, the Parent's or the Affiliated Corporation's financial statements.

11. Notwithstanding the establishment of the Trust, the terms of the Plan and the funding policy with respect to the Plan shall remain the sole responsibility of the Corporation and the Affiliated Corporation.

12. The Corporation and the Affiliated Corporation will notify the Trustees of the funding policy to be adopted to fund the Trust. The funding policy will indicate if the Plan is to be funded on a pay-as-you-go basis or an actuarial basis. The Trustees will be bound by the funding policy adopted by the Corporation and the Affiliated Corporation. It shall be the duty of the Corporation and the Affiliated Corporation to determine the level of contributions to be made to the Trust to appropriately fund the benefits payable under the Plan (the "Required Contributions").

13. The Trustees will be empowered to enforce collection of the Required Contributions.

14. All Required Contributions will be irrevocably committed to the Trust and can never revert back to the Corporation, the Parent, the Affiliated Corporation, related persons of the Corporation, Parent or Affiliated Corporation and any persons described in subsection 251(3) of the Act, including the time of the Trust's termination.

15. Subject to any investment policy adopted for the Trust pursuant to the provisions of the Trust Agreement, or the directions of any investment advisor appointed pursuant to the Trust Agreement, if any, the Trustees will invest and re-invest the capital and income of the Trust using the "prudent person" approach. In no event shall the Trustees be permitted to grant any of the assets of the Trust to, or permit that assets of the Trust be invested in, any kind of indebtedness issued by the Corporation, the Parent, the Affiliated Corporation, any related persons of the Corporation, the Parent or the Affiliated Corporation and any corporation to which subsection 251(3) of the Act applies.

16. Benefits administered by the Trust will in all circumstances be limited to those described in paragraph 1 of Interpretation Bulletin IT-85R2.

Purpose of the Proposed Transactions

The Corporation and the Affiliated Corporation will establish a H&WT for the following reasons:

(a) The Corporation and the Affiliated Corporation will provide the Beneficiaries with insurance coverage that will be renewed annually during the lifetime of an Executive Employee.

(b) The establishment of an irrevocable trust arrangement, under which the Trustees will receive, hold and invest contributions from the Corporation and the Affiliated Corporation, and pay benefits in accordance with the Plan, will enable the Corporation and the Affiliated Corporation to meet their objective of securing benefits under the Plan for the Beneficiaries.

(c) The Corporation and the Affiliated Corporation intend that the Trust be a H&WT, pursuant to the administrative guidelines published in Interpretation Bulletin IT-85R2, so that any benefit derived from the contributions of the Corporation or the Affiliated Corporation to the Trust, in respect of the Plan, will not be taxable to the Beneficiaries by virtue of subparagraph 6(1)(a)(i) of the Act.

By providing the benefits under the Plan through the Trust, rather than through pure conventional insurance contracts, the Corporation and the Affiliated Corporation improve their cash positions, reduce net costs and improve the rights and security of the Executive Employees to health benefits.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested;

our rulings are as follows:

A. Provided that:

(i) The benefits administered by the Trust are restricted to a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy, or any combination thereof;

(ii) No portion of the funds held by the Trust can revert to the Corporation, the Parent, the Affiliated Corporation, related persons of the Corporation, the Parent or the Affiliated Corporation or any corporation to which subsection 251(3) of the Act applies, including the time at which the Trust is wound up;

(iii) The Trust Fund is used to provide the health and welfare benefits for which the Required Contributions are made;

(iv) The Required Contributions are not voluntary or gratuitous;

(v) The Required Contributions are enforceable by the Trustee; and

(vi) The Trustees act independently of the Corporation and the Affiliated Corporation:

the Trust will qualify as a H&WT, as described in Interpretation Bulletin IT-85R2.

B. In any taxation year in which the Corporation's or the Affiliated Corporation's Required Contribution to the Trust, as described in paragraph 12 above, exceeds the amount needed to provide the current year benefits paid to the Beneficiaries, such excess funding will be subject to the application of subparagraph 18(9)(a)(iii) of the Act.

C. The Beneficiaries entitled to benefits under the Plan will not be required to include any amount in their income pursuant to sections 5, 6 or 56 of the Act, as a consequence of the contributions by the Corporation or the Affiliated Corporation to the Trust, the acquisition by the Trust of insurance policies or the payment of health and dental benefits to a Beneficiary under the private health services plan.

D. The Trust will be subject to tax, under section 104 of the Act, on the net income of the Trust. The Corporation's and the Affiliated Corporation's Required Contributions to the Trust, as described in paragraph 12 above, will not be included in computing the income of the Trust. The payment of any premiums by the Trust to an insurer to purchase insurance policies, as described in paragraphs 8(b) and 9(d) above, will not be deductible in computing the income of the Trust.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are implemented on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch